Laura Smith owns her home, for which she paid $350,000 and has occupied it as her principal residence for 6 years.
If Laura sells her home for $560,000, must she pay any federal income tax on her profit? Why?
ANSWER:
To determine if Laura must pay federal income tax on the profit from selling her home, we need to consider the capital gains tax rules for the sale of a primary residence in the United States.
Under current U.S. tax laws as of my knowledge cutoff in September 2021, an individual can exclude a certain amount of capital gains from the sale of their primary residence from federal income tax. This exclusion is known as the “home sale exclusion” or “primary residence exclusion” and is covered under Section 121 of the Internal Revenue Code.
For a single taxpayer like Laura, the maximum amount of capital gains that can be excluded is $250,000. However, if Laura is married and filing jointly, the exclusion amount increases to $500,000. To qualify for the exclusion, Laura must meet certain ownership and use requirements.
Laura must have owned the home for at least two years during the five-year period leading up to the sale. In this case, Laura has owned the home for six years, which satisfies the ownership requirement.
Laura must have used the home as her principal residence for at least two years during the same five-year period. In this case, Laura has occupied the home as her principal residence for six years, satisfying the use requirement.
Given that Laura has met both the ownership and use requirements, and her profit from the sale is $560,000, she would be eligible for the maximum home sale exclusion of $250,000 (or $500,000 if she is married and filing jointly). As a result, if Laura is a single taxpayer, she would not owe any federal income tax on her profit from selling the home because it falls within the maximum exclusion amount.
It’s important to note that tax laws are subject to change, so it’s advisable to consult with a tax professional or refer to the most recent IRS guidelines at the time of filing taxes to ensure accurate information regarding capital gains taxes and home sale exclusions.
